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US Fed puts China on edge of a liquidity trap

The volatility in the yuan over the last week dramatizes the difficult road ahead for the People’s Bank of China (PBOC).

PBOC Governor Yi Gang spent the last six-plus months trying to pull off a precarious balancing act: supporting flagging growth while preventing surging global inflation from upending Asia’s biggest economy.

This feat is getting harder by the day thanks to Yi’s counterpart in Washington, Jerome Powell. At Federal Reserve headquarters, Governor Powell is scrambling to clean up a mess of his own creation.

Because the Fed didn’t tighten when it could – say, 12 months ago – it’s playing catchup on the worst inflation in 40 years. Now, fears of recession have Powell on a tightrope the likes of which the Fed has never had to navigate.